Before starting today's text, you can imagine this scene:
You watch EUR/USD for weeks on end, waiting for it to break a key support level, thinking you can cash in on the ensuing dip. You have been unbelievably patient these weeks, and have believed and waited for the euro to fall.
Finally the moment comes, you open the trade, enter the necessary information, and place a limit order. Before you go to bed, you are secretly excited about the possible huge profit in your mind.
Unexpectedly, the next morning, you found that EUR/USD not only did not fall as expected, but even jumped up by 200 points.
Is this scene familiar? Mex Group guesses the answer is yes, almost everyone has experienced this, even the best looking trade setups can give you a crit from time to time.
Why is this happening? More importantly: How can you avoid this risk, or even profit from it?
Hopefully today's article has given you a fuller understanding of breakthroughs, how they form and how we can exploit them.
First, let’s take a look at what is a breakthrough?
A breakout is when price action breaks out of a support or resistance area. Both horizontal and diagonal lines can be broken, depending on the shape of the price action.
The following are two types of breakout patterns commonly seen in the forex market: bullish and bearish breakout patterns.
figure 1:
figure 2:
In Figure 1, the market was in an uptrend and the horizontal line met resistance and broke it for the third time, indicating a bullish breakout of a key resistance level. In Figure 2, the market was in a downtrend and the price broke support for the third time, indicating a bearish breakout of a key support level.
These breakouts are so important because they often represent the beginning of increased market volatility and lead to new trends. Therefore, when a breakout occurs, we can immediately enter the market in time to catch the underlying new trend.
2. Breakthrough trading strategy
Next, Mex Group will share a commonly used breakthrough trading strategy. This strategy is very reliable and can bring high profits. It mainly includes four parts:
1) support
2) resistance
3) Breakthrough
4) Retest
In the figure above, there are two trend lines, the upper one is regarded as a resistance line, and the lower one is regarded as a support line. This shape is what we often call a wedge shape. Wedge and channel breakouts are two of the easiest breakout strategies.
A wedge breakout occurs when the market finally breaks out to one side or the other. Generally speaking, Mex Group believes in the real performance of the market more than considering future price trends. Let's take a look at the wedge breakout in the USDJPY 4-hour chart.
Note that in the chart above, the price has formed a wedge pattern. As the market started to enter a period of consolidation, the price eventually broke through the support of the wedge, which was subsequently retested and turned into a new resistance level. That said, this retest presents an excellent opportunity for traders to short.
Example 1
The following Mex Group uses Example 1 to introduce a detailed breakthrough trading setup, including entry, stop loss and take profit.
01 admission
Most of the time, the entry point is where the market retests a previous support or resistance level. However, due to varying strengths and weaknesses of the market, sometimes a retest may not occur.
02 stop loss
The stop loss should be placed just above or below the breakout candle. The picture below is the 4-hour chart of USDJPY. Obviously, a breakthrough pattern has appeared. At this time, the stop loss should be set above the candle line breaking through the support line.
In the chart above, the market broke out of the support of the wedge on the breakout candle and subsequently retested the previous support as new resistance. At this point traders can go short below the support of the breakout candle.
03 Take Profit
After entering the market and setting the stop loss, it is necessary to set the take profit. Personally, I prefer to use a simple candlestick chart, as shown in the image below:
The picture above is the USDJPY daily chart. The strong support level has been maintained for several months, and it is the most suitable place to set a profit stop.
04 Risk-reward ratio
So, what kind of risk reward ratio do we get from this trade setup? let's see.
In the USDJPY 4-hour chart above, we can see that the stop loss position is 13 points away from the entry point, and there are 50 points from the entry point to the take profit, that is, the risk-reward ratio is 3.8R (50/13 ). In other words, if the trade was risked at 2%, it would make a 7.6% profit (3.8 x 2%).
This profit is already very considerable, and it is still so much earned in just 32 hours. It appears that the simple "profiteering" title of the breakout strategy really lives up to its name.
Finally, we need to grasp several concepts related to breakthroughs:
1) All trends originate from breakthroughs, but not all breakthroughs develop into trends.
2) If we expect a trend to form, intervene after a breakthrough, with the goal of obtaining a larger profit, otherwise, we must protect and exit with a small stop loss.
3) There is inertia in the fluctuation rhythm of the breakthrough, so be careful not to make orders against the trend.
4) When intervening after a breakthrough, attention should be paid to the persistence and penetration in the later stage. If it cannot be maintained, the position should be closed in time.
Summarize
Like any other trading strategy, this breakthrough strategy also has certain risks. The most important thing is that no matter how the order is set, you must ensure that you choose the appropriate risk and set an effective stop loss.
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